The title of my column last week was "How Early Can You Sell Your Business?" And a couple of weeks ago I wrote about how patents have made it much easier for entrepreneurs to sell companies early for a lot of money.
The Pacinian case study is an exciting entrepreneurial success story which combines both of these new trends.
The company was started by two techies who believed they could build a thinner computer keyboard. This was just before the huge success of the Apple MacBook Air, then the thinnest laptop available.
Pacinian Corp. was founded in 2007 by Jim Schlosser and Cody Peterson in Coeur d'Alene, Idaho. They raised about $2 million in their first angel round and tried to build a prototype. As often happens in entrepreneurial companies, they needed to pivot (a euphemistic term that describes what happens when your idea doesn't work out).
Like most successful entrepreneurs, their initial setback didn't deter them. They raised another $2 million from angels and tried again. Which led to pivot number two.
The founders were lucky to have attracted a veteran angel investor, Johnny Humphreys, who became Pacinian's chairman. The company was also fortunate to have some very patient angel investors, including the Frontier Angel Fund, a Montana angel fund that includes the famous angel investor Bill Payne who became a board observer. Johnny and Bill believed in what Jim and Cody were doing, and helped to raise the third $2 million from angels.
The founder's dream was to build keyboards. They imagined a big factory cranking out their designs and selling keyboards to computer and peripheral manufacturers. But after their third pivot, and third round of funding, it was clearly not going to be that easy.
This realization led to a series of long, and sometimes loud, discussions at the board table. Pacinian was fortunate to have several strategic options. They had interest from venture capital funds who said they'd fund the company through to production, and they had discussions with some big companies about licensing deals.
Bill Payne thought there was a better option: an early exit. He encouraged Jim and Johnny to attend an Exit Strategies workshop hosted by the Vancouver Angel Forum in November 2010. Jim and Johnny were enthusiastic participants in the workshop, and I had an opportunity to get to know them at the end of the day. We continued the conversation for a couple of months and I agreed to help them with their exit.
After the workshop, Jim and Johnny believed "they had proven the model" and that an early exit was their best strategy. They knew it would be difficult to raise more capital--at least on terms that would be fair to the founders and existing investors. They also knew that a licensing deal would solve their short term cash requirements, but like most licenses would likely end up in a legal battle down the road. But others on the board just didn't believe it was possible to sell a company before its first dollar in revenue. The debate lasted for months.
In the end, they decided to try and sell the company for $20 million. At this stage they didn't even have a final pre-production prototype. What they did have was a pretty interesting patent portfolio.
Pacinian designed and executed their exit perfectly. They followed all of the exit best practices and ended up with several competitive bidders. Johnny Humphreys is a fearless negotiator. After they received an offer for $20 million he went back to the board and got approval to increase the price to $25 million. Then he went back again to raise the price to $30 million.
In the end, the Pacinian board selected Synaptics of Santa Clara, as the buyer in a deal that closed in August 2012. Synaptics is a public company that manufactures touchpads and other computer peripherals. Pacinian's technology was a perfect fit with the company's other products.
The founders and all of the angel investors were very happy and made an excellent return. Jim and Cody continued to have fun designing even better keyboards and had the satisfaction to see them being mass produced.
For more on how Pacinian was sold for $30 million pre-revenue, read the full case study here.